Author: Chuck Saletta | August 12, 2019
This road leads to a happy retirement
Your retirement can be an incredibly joyful part of your life. Indeed, many people report being at their happiest in their lives in their late 60s and beyond, well into the standard age of retirement. Yet to really make your retirement dreams come true, you need to have a plan for your time that works within your money -- and enough money to handle the things that really matter most to you.
The following are 10 things you can start doing today that will help you on your path towards making your retirement dreams come true. While it’s easier if you start planning for your retirement while you’re young, these suggestions can help make your golden years more golden even if they’re just a short while away at this point.
1. Sign up for a “My Social Security” Account
Your Social Security benefit is customized based on your earnings record and your age at the time you start claiming it. Because it is so customized, nobody knows exactly what your benefit will be until you actually file to start receiving it. The best estimate of what you’ll get comes from the Social Security Administration, and the easiest way to get that estimate is with an online account with Social Security itself.
To set up your account, visit this site and follow the instructions on the “Create an Account” page. You’ll need to prove your identity to complete the signup. Once you have an account, you can check your earnings history and estimated benefits and start to get a handle on what may be coming your way in terms of Social Security.
2. Determine if you’re willing and able to work a few more years
Once you have your My Social Security account, download the Social Security statement it provides, and read it very carefully. You’ll quickly notice that you’ll only get the headline benefit you’re promised if you keep working and earning about the same between now and when you reach your full retirement age. If you haven’t reached it yet, your full retirement age is somewhere between age 66 and 67. Stop working and claim earlier -- or slow down in a partial early retirement -- and your benefit will be lower.
Your Social Security benefit is based on your highest 35 years of earnings. Work less than 35 years, and some of those years will be entered as $0 for you. Work more, and your higher earning years will override your lower earning ones, potentially helping to boost your benefit.
3. Figure out how to increase your earnings
In addition to the number of years you work, the level of your salary each year also plays into the Social Security benefit you receive. In 2019, the first $132,900 of your salary is taxed and counts towards your Social Security benefit, but that amount may adjust upwards each year. If you’re earning less than that, every dollar you earn up to that limit goes towards building your benefit.
That holds true whether you’re able to get a raise or overtime pay at your main job or pick up a side gig to help close the gap. Note that if you have two or more employers, each will withhold Social Security taxes as if it were your only job. If that leads to you exceeding the total taxable salary limit for the year, you can get the excess withholdings back when you file your taxes for the year.
4. Decide how long you can wait before you claim Social Security
In addition to your years spent working and your annual earnings, the age at which you claim Social Security retirement benefits plays a role in how much you receive each month. You can start collecting retiree benefits once you reach age 62, with your monthly benefit increasing the longer you wait up until age 70.
Because your monthly benefit increases by waiting, you face a tradeoff. The longer you wait, the higher each monthly check, but the more months you receive $0 from the program and thus have to cover your costs from some other source. If you’re still working, that may not be a big deal, but if you’re retired, it likely is. On a pure break-even basis, you generally come out ahead by waiting if you live past around age 80, but from a cash flow perspective, the difference can be more than $1,000 each month.
The choice is yours and depends heavily on your individual situation, but if you’re going to wait, you absolutely need some other source of cash to tide you through until you collect. If you start planning for it today, you’ll be better prepared when that time comes to make a choice that truly works best for you.
5. Make a debt elimination plan
Generally speaking, retirees spend less than working people do. A big part of that is because working people frequently have mortgages, car payments, and other debt-service costs, while typical retirees have had more opportunity to pay off those debts. Paying off your debts before you retire is a great way to help each dollar you do have in retirement go all that much farther.
After all, the principal and interest payments go away once you pay off a debt. That not only reduces your cash drain, but it also increases your flexibility by having less of your cash spoken for each month. If, like most people, your income drops once you stop drawing a paycheck, having more control over the money that does come in can go a long way towards making up for the fact that there’s less coming in.
6. Figure out other ways to keep your costs down
There’s a rule of thumb in the retirement planning community known as the 4% rule. In essence, it indicates that if you follow a few straightforward guidelines, you can set up a spending plan based on spending 4% of the starting value of your portfolio each year, adjusted for inflation. Key among the guidelines is that you have and keep a diversified, well-balanced portfolio. Follow the plan, and you have a very good chance of seeing your money last as long as your retirement does.
What this has to do with keeping your costs down is simple. If you do some math on the 4% rule, it tells you that for every $1 dollar you can cut from your monthly expenses, you can cut $300 from the value of the portfolio you need to support those expenses. Especially as you get closer to retirement, it gets harder to build a significant nest egg, making cutting your costs incredibly important when it comes to assuring your money will last throughout your retirement.
7. Start shoring up your nest egg
Social Security is only designed to cover around 40% of the average retiree’s pre-retirement income. Unless you have incredibly inexpensive retirement dreams compared with what you were earning before you retired, you’ll need more than just that to achieve those dreams. How much? Well, that same 4% rule means that for your retirement nest egg to have a strong chance of lasting through a 30-year retirement, you need to have saved up 25 times the annual expenses you need it to cover.
Broad based stock index funds -- such as ones that track the S&P 500 -- are great tools to help you build your nest egg. While the stock market may go up or down in any given year, over the long haul, it has delivered annualized returns around 9.5%. That’s enough to double your money around once every eight years or so, which can go a long way towards helping you build a sizable nest egg. Even if you are close to retirement already, you’ll likely have a long-term future that requires holding some stocks.
8. Take advantage of all the free money you can
While building your nest egg, you will likely have at least one or two sources of “free money” to help your money grow faster. The two most likely sources are Uncle Sam and your employer. For most of us mere mortals, taking advantage of bonus cash they offer is one of the smartest moves you can make when it comes to making it easier to reach your retirement dreams.
Uncle Sam offers tax benefits for retirement savers in the form of qualified retirement plans, like 401(k)s and IRAs. Money invested in those plans grows tax deferred -- meaning you don’t pay taxes on typical gains or dividends that stay within the account. In Traditional style plans, you may also get a tax deduction for contributing, and in Roth style plans, you can often withdraw money completely tax free in retirement.
In addition, your boss may offer to contribute towards your retirement. Frequently, that offer comes in the form of a matching contribution. For example, a fairly common match is “50% of your contribution, up to 6% of your salary.” In other words, if you earn $50,000 a year, your boss will contribute up to $1,500 towards your retirement, as long as you sock away at least $3,000 on your own. The combination can quickly add up to a decent nest egg, particularly if you have the time to let compounding work.
9. Get ready to convert some money to lower volatility investments
While stocks are a great way to build wealth, they’re a difficult asset to rely on when you need to pull money out of your portfolio as a retiree. Their volatility means that if you’re relying on selling them to cover your immediate costs of living, you may need to sell more than you can truly afford to when the market moves against you. That can be dangerous to your long term financial health at a time when you’re no longer working and are thus unable to make it up by saving more.
As a result, you need at least a portion of your money available in less volatile assets like investment grade bonds or cash in order to be able to pull out spending cash when you need it. A decent rule of thumb is that any money you expect to spend in the next five or so years should not be in the stock market. Any money you don’t expect to need for at least that long may well deserve a place with your other longer-term investments in stocks or stock funds.
10. Have a plan for your time as well as your money
After you retire, you will still have 24 hours in every day and seven days in each week. Once the novelty of “every day feels like Saturday” wears off, you’ll likely realize just how long those hours and days are. Chances are, you’ll even start to miss things like the camaraderie, structure, and shared purpose of working, even if you remain overall glad to have left the workforce. In addition, you’ll soon find the friends and family you wanted to spend more time with also have other lives of their own to attend to.
As a result, your plan for your time is at least as important as your plan for your money once you retire. You may want to volunteer for a charity, get a low-stress retirement job, reacquaint yourself with your faith, join a social club, or otherwise find meaningful ways to fill your days. The big advantage you have as a retiree is that you can choose to invest as much or as little of your time as you’d like in any activity. That gives you incredible freedom to focus on only those people and activities that matter to you.